For corporate Japan, burdened by one of the industrialized world's steepest tax rates, a tax cut at the center of Prime Minister Shinzo Abe's latest growth strategy will end up giving with one hand - and taking back with the other.
While the headline tax rate will fall, Tokyo, under pressure to shore up its finances with a public debt twice its annual GDP, is seeking to offset the tax cut by scaling back exemptions and deductions favoring small and loss-making companies.
That regime - in which fewer than a third of firms shoulder the entire corporate tax burden - has been seen as essentially subsidizing inefficiency and punishing profitability.
"Corporate tax cuts and broadening the tax base would make Japan's taxation fairer and more stable, even though it would impose a burden on unprofitable companies that are not paying corporate tax, many of which are small and unlisted," said Hiroshi Watanabe, senior economist at SMBC Nikko Securities.
"If the government continues to levy high tax on profitable firms, that would drive more firms out of Japan."
The changes, part of the latest instalment of Abe's "Third Arrow" of growth-promoting structural reforms, will mean short-term pain for the 70 percent of Japanese firms that pay no corporate tax, especially among the small firms that employ seven out of 10 Japanese workers.
In other developed economies such as the United States and Britain, by contrast, more than half of firms pay corporate tax.
But in the longer term, the changes are expected to nurture more profitable firms, while it is hoped the lower tax rates will encourage foreign direct investment and capital spending to spur growth under the reflationary policies dubbed "Abenomics".
Carrying forward losses
Abe's cabinet approved on June 24 the plan to cut Japan's corporate tax rate - among the highest in the world at above 35 percent - to less than 30 percent over several years.
Decisions on how to offset revenue losses and other details were deferred, but a government tax panel has issued proposals that included expanding taxation to companies with less capital, meaning that even loss-making firms will have to pay local corporate tax.
The panel also proposed changes to deferral provisions, which let companies carry forward losses to offset future taxes.